The Variation in a Performance Compensation Plan is Based on Different Goals and Objectives

The objective metrics in a performance compensation plan change based on position, corporate goals, profitability, and the bonus pool

In the group plan area, we have management incentive programs. These are like an executive performance compensation plan. Here they have very quantitative kinds of goals for the executives. It’s an area where you may be able to measure how well, in a quantitative term, a potential executive achieved its goals. But they also may have MBO types of goals as well.

A company wide performance compensation plan has become increasingly common. I would encourage you to consider it for your own organizations, as well. Essentially, the goals are based on how well the company performs against its goals. And, then a pool of money is set aside and then eventually distributed to individuals.

The same principle operates on a team performance compensation plan, although in some cases, they maybe milestone-driven. The goals maybe develop a particular product at a particular point in time in the engineering cycle. And, certain amount of money will be paid to whoever is on that team.

Gain sharing is a different type of program. It is a group performance compensation plan. They’re not as popular as they used to be. Essentially, what gain-sharing does is it shares – it sets up a program where employees and management work together to essentially decrease expenses and consequently increase profits. And, whatever savings they can come up with or decrease the expenses and still make a profit, they share with the employees. You know, the problem with these types of programs, is it serves a point of diminishing returns on decreasing expenses before you start cutting into bone.

Profit sharing program, you probably all know what that is. There are various versions of this performance compensation plan out there. But, from the strictest sense of the words, profit sharing means that the company has to make a profit and if they do, they put a certain percent of that – those profits, 5%, 6%, 7% they distribute it to employees.

Generally, all employees get the same amount although there have been variations on these themes over the years, where higher level people may get a larger percent profit sharing than others. But, the downside to profit sharing is it generally does not consider individual performance.

On the individual plans side, you have, obviously, sales incentive plans, we’ll talk about that in a little bit. You have piecework plans, these are – could be assembly line workers, et cetera, making widgets, whatever they may be, they get certain amount of money per widget.

Referral bonuses or even individual plans, by referral, I mean referring employees, potential candidates to the company who eventually get hired as employees. These are paid to an individual, but the reason for payment, the rationale for payment is generally specified to all employees.

Spot award plans are an individual performance compensation plan. Their goals may not necessarily be established, but they are bonus programs.

Edited Remarks from “Incentive Talk: How to Design an Incentive Plan that Works for – Not Against – Your Company’s Goal”

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